Opinion
Decided October 23, 1931.
Oil and gas — Off-set wells not required — Lessee elected not to develop property, and offered to surrender lease.
Where, by the terms of an oil and gas lease, the development of the property and the continuance of the lease in force are optional with the lessee, a provision requiring the lessee "to protect the lines of said premises by off-setting any paying producer that is drilled within three hundred feet of the lines thereof," does not, where the lessee has not elected to develop the property, create an obligation upon the lessee to keep the lease alive and drill an offset well in the event the lessee elects not to develop the property and promptly offers to surrender the lease.
APPEAL: Court of Appeals for Summit county.
Mr. Willis Bacon, for plaintiffs and defendant Cameron.
Messrs. Booth, Keating, Pomerene Boulger, for defendant Cameron.
Messrs. Tolles, Hogsett Ginn, Mr. Wm. McE. Weldon and Mr. R.H. Nesbitt, for defendant the Ohio Brass Company.
On September 28, 1929, this suit was begun by the lessors of an oil and gas lease to compel C.S. Cameron, the lessee under the lease, and the Ohio Brass Company, the assignee of said lease, to drill an offset well on the leased premises.
Said lessee filed an answer and cross-petition admitting his original obligation to drill such well, but alleging that his said assignee agreed to perform said obligation and relieve said lessee therefrom, and prayed that said assignee be required by mandatory injunction to perform said obligation.
The assignee of said lease answered the petition of the lessors, admitting the making of the lease, the terms thereof, and the assignment of said lease to it, but claimed that said lease was null and void and that said assignee was under no obligation to said lessors to drill said well.
The matter is before this court solely on the question whether or not said assignee is obligated to said lessors to drill said well, and should be required to do so by a court of equity.
The lease granted to the lessee "all the oil and gas in and under" the premises described therein, with the "exclusive right of drilling and operating thereon for said oil and gas at any and all times for and during the full term of five years from the date" thereof, "and as much longer as oil and gas is found in paying quantities thereon;" said lessors to have one-eighth of the oil and gas produced.
There is an express provision that said lease is assignable, and said lease contains the following provisions:
"If a well is not commenced on the said premises within one year from the date hereof, this lease shall become null and void unless second party shall thereafter pay to the first party an annual rental of Five 00/100 Dollars in advance, until a well is commenced. * * *
"It is expressly agreed that the right to so extend and continue this lease is fully paid for by the consideration and rentals above named and that such payments when made shall extend this lease from time to time during the term of this lease, until a well is commenced. * * *
"Said second party agrees to protect the lines of said premises by off-setting any paying producer that is drilled within three hundred feet of the lines thereof; and it is agreed that the drilling of said well or wells shall be considered a full and sufficient off-setting and development of the premises conveyed by this grant.
"It is also agreed upon that all the terms, conditions and agreements hereof shall extend and apply to the heirs, executors, administrators, successors and assigns of the parties hereto."
There is nothing in the written assignment of the lease made by said lessee which in any way changes or adds to the obligation under the lease to drill a well, and the only effect of the assignment was to transfer the rights of the lessee under the lease to his assignee and obligate the assignee according to the terms of the lease; and the original lessee could not thereafter add to or change the obligation of the assignee under the terms of the lease.
The lease was made on September 17, 1927. The assignment of the lease was made on February 2, 1928. No well was drilled and the assignee paid the $5 rental provided for in the lease for the year beginning September 17, 1928, and Cameron, the lessee, paid the $5 rental on September 17, 1929.
In August, 1929, a producing well was drilled upon adjoining premises within three hundred feet of the lines of the premises leased.
On August 23, 1929, lessors notified said assignee of the drilling of said well and demanded that the assignee drill an offset well on the leased premises.
On August 31, 1929, said assignee acknowledged receipt of said notice but declined to drill an offset well, for the reason that the lease by its terms expired in a short time, and in the assignee's opinion the development in that territory was not such as to warrant the expenditure of the amount necessary to drill such a well, and assignee offered to surrender said lease to said lessors.
This suit was then begun on September 28, 1929, to compel said assignee to drill an offset well.
The contention of the assignee is that its obligation is such only as is fixed by said lease, and that there having been no development under the lease, and there being no provision requiring the assignee to develop the property, but, on the contrary, there being an express provision by which the assignee's right to develop might be preserved by the payment of a rental, said assignee had the right, when said demand was made, to elect whether it would preserve its right to develop by complying with said demand or abandon and surrender the lease, which latter said assignee offered to do; and that the provision of the lease in reference to an offset well, when all of the provisions of the lease are considered, did not obligate said assignee to begin the development of said property if it honestly thought it would be unprofitable to do so and was willing to surrender the lease.
It will be noted that said lease grants to the lessee the right to operate under the lease, but does not require the lessee to do so, and contains the provision which is now quite common in such contracts, to wit, "If a well is not commenced on the said premises within one year from the date hereof, this lease shall become null and void unless second party shall thereafter pay to the first party an annual rental of five dollars ($5) in advance until a well is commenced."
In some of the states leases similar to this one, and containing the above-mentioned provision, are construed to give to the lessee an option to continue the lease in force for the full term thereof by paying the rental in the manner provided, although there is no development of the property, or to terminate the lease at will, "which privilege may be exercised by a mere failure to pay the stipulated rental at the time due, upon the happening of which the lease automatically terminates." 1 Thornton's Law of Oil Gas (4th Ed.), 239, Section 78a. See, also, Brown v. Fowler, 65 Ohio St. 507, 63 N.E. 76; Van Etten v. Kelly, 66 Ohio St. 605, 64 N.E. 560; Kachelmacher v. Laird, 92 Ohio St. 324, at page 334, 110 N.E. 933, Ann. Cas., 1917E, 1117.
It is evident that if the lessee may elect to permit the lease to lapse, he is under no obligation to develop the property if he does not choose to do so, unless the provision as to an offset well places such an obligation upon him.
We think that where no development has been begun, the set-off provision does not create an obligation upon the lessee to keep the lease alive, and does not deprive the lessee of his option to permit the lease to become null and void in accordance with its provisions.
In this case the lessee exercised that option, and offered to surrender the lease, and when this suit was begun said lease was null and void and said assignee was under no obligation to said lessors, either in equity or law.
In our view said set-off provision did not create an obligation independent of the other provisions of the lease, which was to be performed regardless of whether the lessee exercised his option to develop said property; and therefore said assignee was not required to drill an offset well in the event it elected to let the lease lapse.
It seems to us that by a fair construction of the whole lease the effect of said set-off provision was simply to require the assignee, when a set-off well became necessary for the protection of the premises leased, to elect whether it would develop the property or exercise its option and surrender the lease immediately.
The prayer of the petition of the lessors is denied, and the petition, and the cross-petition of the original lessee, are dismissed.
Decree accordingly.
PARDEE, P.J., and FUNK, J., concur.